Four at Four: A Run on the Banks, But Not the Market

By David Gaffen

The S&P 500 ended down today, but it was hardly a melt-down.

After all that, the Dow industrials put together a rally, and the action in the major averages does not suggest what seemed to be a harbinger of impending doom. It wasn’t a good day, per se — Bear Stearns has been taken out and shot, of course, and numerous other financial firms were hammered by short-sellers, continuing the modern-day run on the banks witnessed in Bear last week. However, the rest of the market wasn’t a disaster. There’s an emerging line of thought that this is perhaps the time to buy stocks (though probably not banking stocks). “We’re not seeing a lot of stocks at 50-day lows or yearly lows like we did in January, so many groups of stocks are in a phase of healing,” notes Steve Goldman, strategist at Weeden. For that matter, as interest rates continue to decline (and the two-year note is traded at 1.38% of late), bonds become very unattractive when compared to stocks; in fact, equities are at their most attractive levels when compared to bonds since 1985, according to Ben Pace, chief investment officer at Deutsche Bank’s private wealth management group. “This is not the first time financial crisis has hit the equity markets,” he writes. “While we will only know the extent and magnitude of the unrest in hindsight, previous incidents such as Long Term Capital Management (1998) and Drexel Burnham (1989) proved to be isolated incidents and the negative sentiment did not linger for long.” This one, however, has lasted eight months — and it has proven hard to shake in the past.

Regardless of the performance of rest of the market, investors took aim at derivatives-focused brokerages in today’s trade, in part due to concerns about liquidity at MF Global, which fell by 58% in today’s trade. “The fear within this sector is that these types of companies have been caught with a huge pile of something toxic that will implode which will then force them to take a huge loss,” writes Andrew Horowitz on his Disciplined Investor blog (his company has positions in stocks in this sector). MF Global wasn’t alone, though — Interactive Brokers fell by 14%, FC Stone Group dropped 41%, Penson Worldwide fell 19%, and GFI Group was down 21% in active trading on the major exchanges. “The outcome for these companies seems rather binary to me,” writes Fil Zucchi on Minyanville.com, who has a position in FC Stone. “Either they fail because the system seizes up on them, or they thrive.”

The market await tomorrow’s earnings results from investment banks Lehman Brothers and Goldman Sachs with nervous anticipation. Both firms are expected to have achieved a profit in the first quarter, but the current analyst consensus suggests that tomorrow’s results are anyone’s guess. A number of analysts countered rumors of problems at Lehman Brothers by saying the firm is on solid ground financially – Deutsche Bank analyst Mike Mayo notes that the firm has about $98 billion of available liquidity, enough to cover $28 billion of unsecured short-term debt the bank holds. Goldman Sachs, meanwhile, is displaying a few fissures, as the U.K.-based Telegraph reported the firm will take a $3 billion asset writedown. According to Thomson Financial, the mean estimate is for earnings of $2.58 a share at Goldman, but that encompasses a range of $1.95 a share on the low end and $3.40 on the high side. Lehman estimates, similarly, are all over the map – $1.13 is the high, 45 cents is the low, 72 cents is the mean. (By contrast, a boring plain-Jane type like 3M is forecast to report $1.35 a share in earnings — with a tight range of $1.25 to $1.40.)

The lingering question for the fixed-income markets remains the same, even as the collapse of Bear Stearns has shaken out some of the worry: Is this all there is? If this indeed was the watershed event (combined with moves from the Fed) that causes the capitulation (or some type of it) in the equity market, what investors would hope to see in coming weeks or months is a recommencement of lending and borrowing activity in the loan and the bond markets. “The question really is at this point at this point for people who are in the market is how quickly this translates into the dealers and the banks offering liquidity to people who need it,” says Don Brownstein, chief executive of hedge fund Structured Portfolio Management. “I expect that will happen pretty soon.” However, this hasn’t happened yet. Investors in bond markets are still having a hard time buying bonds from dealers, notes Jane Caron, chief economic strategist at Dwight Asset Management. “The bid/ask spreads are ridiculous,” she says. “Nobody is really trying to do anything.”

Comments (5 of 17)

We are facing the back ground of continued housing price slump, which are much more complicated, worse credit crisis situation than LTCM.
Bear Steran crisis is just part of hedge fund failure
due to poor financial derivatives pricing and risk
management, credit estimation, valuation methods.
Besides banking, finance, housing sectors, IT sectors,
retails can not be immuned.
details can be foundhttp://www.osawh.com/fund.htm

10:13 pm March 17, 2008

hammer wrote :

GS will out-perform because of commodities. Crude went up 25% and gold was up 15%. This should have resulted in $1.5bn in additional revenues.

7:40 pm March 17, 2008

On a Dollar razzors edge... you think! wrote :

Sanders, that's a great suggestion... only if our econ holds up, which I have serious doubts now that it will. However whem the Dow hits 18500... not sure when I'll more than likly own some Tech!

7:35 pm March 17, 2008

Sanders wrote :

Worried about debt and leverage of financial companies? Consider moving to Tech sector. Majority of technology companies (especially software and chips) have strong balance sheets and little or no debt. Just look at the two tech giants in Dow Jones 30 – Microsoft and Intel - who have the cleanest balance sheets when compared to others in Dow Jones.

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